Diversification of its sourcing structure and business model allowed Li & Fung to achieve “increased wallet share,” despite seeing turnover and sales slip in the first six months of 2019.
In a Nutshell: Li & Fung Ltd. said Thursday that turnover slipped 8.4 percent to $5.35 billion in the first half ended June 30, largely due to “ongoing destocking, customer turnover and customer bankruptcies as brands and retailers continued to face pressure on sales and margins.”
New customer wins and increased market share, however, helped Li & Fung offset the impact.
The company said its restructured global sourcing network is allowing it to react quickly to minimize the impact of tariffs and focus on business development, “yielding solid customer wins.”
“We are facing increasing geo-economic instability and uncertainty. Regardless of other factors, the acceleration of the migration of production out of China will continue given China’s upgrading of its industrial base from a manufacturing exporter to a high-technology service provider,” group chairman William Fung said.
Li & Fung’s long history, he said, gives the company perspective “that there is constant fluctuation in global trade.”
“That is why we continued to maintain a well-diversified sourcing network spanning more than 50 economies and avoided over-reliance on any single market, even when the environment appeared benign,” Fung said. “This continues to be the right approach. Our ability to leverage this extensive network puts Li & Fung in the best position to help our customers optimize their sourcing and production and minimize tariff impact.”
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In the first half, the company said its top three sourcing countries were China, Vietnam and Bangladesh. It also noted that it has sizable sourcing operations in other countries, including India, Cambodia and Indonesia.
In the first half of 2019, Li & Fung said it was able to drive “increased wallet share” with certain customers and improved customer satisfaction.
“With Li & Fung’s help, brands and retailers are taking their own digital leap with digital design and development, digital planning and assortment, and digital selling,” the company said. “By exploring and adopting flexible pricing models, the company has been able to satisfy specific, individual business needs of its customers and is beginning to gradually ramp up the monetization of the service, which will continue into [the] next three-year plan (2020-2022).”
The Logistics business continued its profitable growth momentum in the six months, with in-country logistics services posting strong top-line and bottom-line double-digit growth. China continued to lead the way, supported by an upsurge of domestic consumption, especially in e-commerce. Accelerated development in LF Logistics’ ASEAN operations contributed to high growth rates and the new markets of South Korea, Japan and India also recorded impressive results.
Earnings: Net profit swung back to the black in the first half at $21 million compared to a loss of $86 million in the first half of 2018. Core operating profit fell 18.6 percent to $105 million on a decrease in sales and total margin in the Supply Chain Solutions business, and continued investment in digitalization in line with the company’s long-term plan.
Total margin as a percentage of turnover was 10.9 percent in the first half, compared to 10.5 percent in the year-ago period. Operating costs declined 1.4 percent to $478 million as gains made from rightsizing the Supply Chain Solutions business and efforts to enhance operating efficiency were offset by digitalization investment and increased operating costs associated with the growth of the LF Logistics business.
CEO’s Take: Spencer Fung, group CEO of Li & Fung, said: “The new management team has been focused on restructuring the company and all operational KPIs (key performance indicators) are now improving for both our customers and suppliers. We are starting to gain momentum and winning market share and new customers due to our operational excellence, global diversified network and 3D virtual design services. As a result, turnover decline is stabilizing and beginning to bottom out.”